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20 Red Flags That Could Lead To An IRS Audit

December 29, 2021

Picture of Cecilia De La Rosa

Cecilia De La Rosa

20 Red Flags That Could Lead To An IRS Audit

There’s nothing more dreaded than a tax audit. Here are some of the most common causes of an IRS audit, and how to avoid them, if you can.

1. Failing to report all your taxable income

Be sure to report all your taxable income on your income tax return. The IRS gets copies of your 1099s and W-2s, and you also need to report other income that doesn’t make it to these forms.

2. Making a lot of money

The more income shown on your tax return, the more likely it is that the IRS will audit you. IRS statistics show that individuals with income between $200,000 and $1 million had up to a 1% audit rate. Those earning more than $1 million had a 2.4% audit rate.

3. Taking a lot of deductions or credits

If you’re taking a high percentage of credits or deductions compared to your income, the IRS may want to take a look at your return. Just make sure you have the proper documentation for each deduction or credit before you file.

4. Claiming large charitable deductions

If your charitable deductions are disproportionately large compared with your income, it can raise a red flag with the IRS. The IRS knows the average charitable donation for people at your income level, and if you’re above that you are more likely to be audited.

5. Running a business

IRS agents know that self-employed people sometimes claim more deductions and don’t claim all their income, so they can be a target. Sole proprietors reporting at least $100,000 in gross receipts have a higher audit risk, as do those who reported substantial losses.

6. Claiming rental losses

The IRS looks carefully at large rental real estate losses, especially those written off by taxpayers claiming to be real estate professionals. It will compare your income to your W-2s and schedule Cs to confirm your income levels match those shown on your return.

7. Not filing taxes

The IRS is increasing its emphasis on individuals who didn’t file tax returns in the past. They are primarily targeting those who received income in excess of $100,000 but didn’t file a return. Rest assured that the IRS will work with you to help resolve the issue and get you back into compliance.

8. Claiming a loss for a hobby

Make sure that you are in business for the right reasons. If an activity generates profit three out of every five years, by law you are presumed to be in business to make a profit. If a business venture causes losses year after year, you are most like pursuing it as a hobby and can’t claim it as a business loss.